Calculation of wages under double tax agreements in dividing up payroll

Changes to payroll tax – applying daily tax table compulsory from 2025

The application of the daily tax table to employees was already amended in the new Payroll Tax Directive 2023 (Lohnsteuerrichtlinie – LStR 2023). According to this, where wages are paid during the payroll period, parts of which are taxable and non-taxable under a double taxation agreement (or the Order on Working Abroad [Auslandstätigkeitserlass]), the payroll tax is to be calculated using the daily tax table – not the monthly table as previously. The Federal Ministry of Finance (BMF) has now made clear that applying this method is compulsory for all payroll periods starting from 2025. This applies equally to resident and non-resident taxpayers, regardless of the extent of the income tax liability.

New principles for dividing up payroll

The new rules allow for five methods to divide up wages when carrying out payroll tax deductions. Important: The selected method may not be changed in that calendar year with the same employment. A simplified variant allows 20 general working days per month to be assumed based on full-time employment with five typical working days per week. As a proportion of 30 calendar days this gives a factor of 1.5.

Alternatively, taxpayers may have their actual location on non-working days taken into account. In this case, they need to clearly demonstrate where they were, regardless of their work in the calendar month.

Effects on tax burden

Which of the five methods results in lower payroll tax needs to be checked individually. The Federal Ministry of Finance’s simplified method in any case reduces the administrative burden because it minimises duties to cooperate and provide evidence.

Starting from 2025, however, the compulsory applications of the daily tax table will result in many employees have a higher payroll tax burden compared to the monthly table. German tax residents can usually have the additional burden refunded by filing a tax return by a certain deadline. For non-resident taxpayers, however, once the amount of tax has been withheld, the tax liability is considered as discharged. EU or EEA state nationals or employees resident in Switzerland can apply for voluntary assessment of income tax. In doing so, they also have to declare non-taxable income under the progression rate scale (Progressionsvorbehalt), which many increase their tax burden and costs for tax advice.

No refund of excess tax on non-taxable income
Employers may not refund excess payroll tax when non-taxable income has been received (Section 42b(1) sentence 3 no. 6 of the Income Tax Act [Einkommensteuergesetz – EStG]). Furthermore, starting with the Annual Tax Act 2024 this option will be abolished if the employee receives wages without tax deductions in Germany.

Recommendations for action for employers

The new Circular makes the legal situation more certain for employers in applying the daily tax table when making payroll tax deductions. Businesses should check whether the daily tax table has already been used or whether they should move over to the monthly table with retrospective effect. Correcting the calendar year 2023 is no longer possible, however. If the daily tax table has been used in 2023, the only thing that can usually be done is to apply for assessment.

Conclusion

The Federal Ministry of Finance Circular makes dealing with the new rules easier, but action needs to be taken quickly. Employers should check the impact of it on their individual tax burdens.

Post written by our experts: Stephanie Tigges, Heike Bathke and Dominik Klyszcz.